Sentiment Speaks: Setup Brewing In The U.S. Dollar

Two weeks ago I wrote an article discussing what was next for the U.S. Dollar after the shorts had capitulated. In that article, I noted that “When the DXY struck the high last week it had stopped just shy of a key resistance level that I had laid out on our charts for several months. This may indeed be the spot where the U.S. Dollar may begin to see a pullback.”

Since the time of that writing and after hitting the underside of the 93.56 resistance, the DXY had moved lower, trading just over the 91.00 level. This pullback is now just over the 61.8% retrace level of the entire move up off of the January lows. This is right in the middle of the ideal support zone for the DXY to attempt to find another bottom and turn back higher back over the highs that were struck at the end of March.

Before signaling that the DXY is ready to push higher, however, I would want to see it find support and see a strong reaction off of one of the key support levels noted on the chart below. This would be the initial signal that we have indeed formed a local bottom and are ready to turn back higher over the 93.44 high. This would then provide an actionable setup to the long side on the DXY.

Should, however, we fail to see a bounce off of the support levels, but rather break that support zone in the 91.30-89.68 zone, then it would increase the odds that we do still need to see another lower low under the alternate red path on the charts, which I alluded to last week. Even under this red path, I would still expect to see this closer to a longer-term bottom vs. seeing the DXY make an extended run lower. We would, however, need to be a bit more patient under that red path for a possible setup to the long side.

So, whether the DXY sees another lower low from here or not, it is looking like the U.S. Dollar will see higher levels over the course of the next several years. The sentiment analysis presented is giving clear parameters to work with and to identify what the risk to reward looks like prior to entering a position and take advantage of what is likely to be a significant move higher in the U.S. Dollar.

Charts By: Michael Golembesky